At the heart of the latest round of the Greek financial crisis lie two battles which are this week moving towards resolution. One is in Athens, the other in Frankfurt. What happens in both cases will determine the outlook for Greece's economy and indeed that of the entire eurozone for years to come. And in both cases the outcome is highly uncertain, which is why financial markets are on edge.

In Athens, George Papandreou finally won the approval of his cabinet this week for his privatisation proposals. After a marathon session, the prime minister got the go-ahead for his plans to sell €50bn of state assets over the next five years in an effort to reduce Greece's massive debt burden to the timetable imposed by the rest of the eurozone and the IMF. Two big questions are, however, still outstanding. The first is how on earth Mr Papandreou will manage to sell €50bn-worth of assets. The really big money-raisers would be utility companies, which are heavily unionised; and one of the reasons they were not sold long ago was because of fierce opposition from organised labour and within the governing socialist party. Winning the assent of the cabinet was merely the first obstacle, albeit a significant one, for Mr Papandreou; he now has to list the ports and water and electricity providers he plans to sell – and handle the inevitable unrest. It is worth noting that many of the analysts who have been over the figures doubt whether Athens will get anywhere near that €50bn target.

The second big question in Greek politics is whether the prime minister will be able to marshal support from within his own cabinet, let alone the wider socialist party, for a package of spending cuts and tax rises. Mr Papandreou has got further with this than many observers typically give him credit for, and has so far outlined about two-thirds of his planned austerity measures for the years from 2012 to 2015 (by which time, theoretically, the Greek budget deficit will be around 1% of national income). But it was notable after Monday's meeting that the cabinet did not announce an agreement on the so-called medium-target fiscal strategy. Evidently, a lot of arguing remains to be done; and that is before the government tries to make those spending cuts happen.

At the moment, however, it is not events in Athens that worry investors but those in Frankfurt. In the headquarters of the European Central Bank the most heated rows are being held in public (despite the best efforts of some officials) about whether Greece will have to pay back all of its debts at full value and on schedule. The central political fact of the past month is that eurozone politicians now recognise, extremely belatedly, that such a prospect is fanciful. Even Angela Merkel, Germany's hardline chancellor, now acknowledges that Greece will need a restructuring of its approximately €330bn of loan repayments. For other policymakers, especially around the European commission, the term du jour is "soft restructuring" – stretching the period over which Athens makes its repayments, and perhaps reducing the interest. Yet that has met with fierce resistance from Europe's central bankers, who have made it clear that they will not support such a proposal.

But whatever the high politics of the Greek crisis there is a crucial aspect of the discussion that is not often aired: the economic reality. The cuts already imposed on Greece have seen its economy collapse and the budget deficit soar way above official forecasts. The emergency loans that Europe and the IMF extended to Athens a year ago were really nothing more than a means for the government to repay its debts rather than regenerate the economy. As Vince Cable rightly remarked yesterday: "You can't just deal with this by cutting, cutting, cutting … it does not work." Sadly, Europe's policymakers are some way from recognising this; nor has the Athens government made the case.